The Principal-Agent Model with Multilateral Externalities: An Application to Climate Agreements

Carsten Helm and Franz Wirl

No 32 / 2014, ZenTra Working Papers in Transnational Studies from ZenTra - Center for Transnational Studies

Abstract: We consider contracting of a principal with an agent if multilateral externalities are present. The motivating example is that of an interna- tional climate agreement given private information about the willingness- to-pay (WTP) for emissions abatement. Due to multilateral externalities the principal uses her own emissions besides subsidies to incentivize the agent and to assure his participation. Optimal contracts equalize marginal abatement costs and, thus, can be implemented by a system of competitive permit trading. Moreover, optimal contracts can include a boundary part (i.e., the endogenous, type dependent participation constraint is binding), which is not a copy of the outside option of no contract. Compared to this outside option, a contract can increase emissions of the principal for types with a low WTP, and reduce her payo§ for high types. Subsidies can be constant or even decreasing in emission reductions, and turn negative so that the agent reduces emissions and pays the principal.

Keywords: private information; multilateral externalities; mecha- nism design; environmental agreements; type-dependent outside options (search for similar items in EconPapers)
JEL-codes: D82 H87 Q54 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2014-01, Revised 2014-01
New Economics Papers: this item is included in nep-cta, nep-ene, nep-env, nep-ore and nep-res
References: Add references at CitEc
Citations: View citations in EconPapers (14)

Downloads: (external link)
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2388640 First version, 2014 (application/pdf)

Related works:
Journal Article: The principal–agent model with multilateral externalities: An application to climate agreements (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zen:wpaper:32

Access Statistics for this paper

More papers in ZenTra Working Papers in Transnational Studies from ZenTra - Center for Transnational Studies Contact information at EDIRC.
Bibliographic data for series maintained by Finn Marten Koerner ( this e-mail address is bad, please contact ).